Warren Buffett closes in on choosing his successor

Warren Buffett, right, with Bill and Melinda Gates: the financier has said he will leave almost his entire fortune, estimated at $47bn, to the couples' charitable health foundation. Photograph: Spencer Platt/Getty Images

One of the most high-profile succession plans in corporate America became a little clearer today when Warren Buffett, the world's most famous investor, selected an almost unknown hedge fund manager as the likely candidate to succeed him as chief investment officer at Berkshire Hathaway.

After a three-year search, Buffett said that 39-year-old Todd Combs, who runs Castle Point Capital Management in Greenwich, Connecticut, would take control of a "significant portion" of Berkshire's $100bn portfolio. Buffett said Combs would initially take on an amount he felt comfortable with, and over time would assume more control. At Castle Point, he has been handling a $400m fund.

The "Sage of Omaha" celebrated his 80th birthday in August, but said in interviews with the American press today that he has no intention of standing down just yet.

He has said he would split his job in three when he eventually retires, with a chairman and chief executive working with a chief investment officer. The company has identified three as yet unnamed internal candidates for the chief executive role, and reports in the US suggest the lead runner is David Sokol, 53, chairman of Berkshire-owned MidAmerican Energy Holdings.

Caveman's job

As well as its sizeable investments in companies ranging from Goldman Sachs to Coca-Cola and American Express, Berkshire owns a stable of businesses, from Geico Insurance, to clothing firm Fruit of the Loom and one of the largest rail firms in the US, Burlington Northern Santa Fe.

Buffett once said his job was so easy "a caveman could do it", but filling his shoes is about more than having a canny eye for picking stocks and buying companies. With their easy charm and straight-talking, Buffett and Berkshire vice-chairman Charlie Munger have made Berkshire's annual meeting in Omaha, Nebraska, a pilgrimage for thousands of investors, a self-styled "Woodstock for capitalists". Bordering on the hokey, Buffett entertains his guests the evening before with a song and the pair dish out homilies and advice to questions from the floor.

His investment philosophy seems almost antiquated in its simplicity. Only invest in stuff you understand and hang on for the long term. That is how he became one of the largest investors in Coca-Cola and avoided getting his fingers burnt during the dotcom boom and bust at the start of the decade. Anyone who followed Buffett's advice and invested in the long term with Berkshire Hathaway has struck gold; over 45 years, its shares have grown at a rate of 20.3% compounded annually.

A $1,000 investment in Berkshire Hathaway in 1965 was worth $4.3bn at the end of last year. However, if he had extracted management fees in the same way as a hedge fund, $4bn would have gone to Buffett and only $300,000 to the investor.

Buffett's annual letter to shareholders is also closely watched. A full five years before the 2008 financial crisis, he dubbed derivatives as "financial weapons of mass destruction". He has also railed against soaring executive pay when few others were paying attention to the issue and has complained that, as a billionaire, he should be paying more tax.

Combs at least has shown some flair in his own letter to shareholders at Castle Point. In his most recent, discussing the possibility of making a bad investment, he drew on the evolutionary process. "We may begin with the acknowledgement of the pervasive reality of failure – that, for instance, 99.9% of biological species that have ever existed are now extinct," he wrote. "Or, a little closer to home, that only one original member of the Dow Jones Industrial index continues to be a member today."

Combs was introduced to Buffett by Munger and set up Castle Point five years ago with seed capital from a private equity firm. Castle Point has achieved cumulative returns of 34% since the fund launched – a period when the S&P 500 index fell by 5.1%. Combs previously worked at a Florida bank regulator and at insurance firm Progressive.

Right type

Buffett told the New York Times that Combs has "always been enamoured with Berkshire. I know he'll be good, but he's the right type of guy. We don't want someone who's trying to figure out if they can make $100m with us or $200m with the next guy."

James Armstrong, president of Henry H Armstrong Associates in Pittsburgh, an investor in Berkshire, said it was rare for Buffett to make this kind of public announcement. "The fact that he's come public with one of the names means he must be pretty confident in Mr Combs, or why release the name? It's not been his practice. It's not a name I've heard before, and I've been studying Berkshire for 25 years."

The issue of succession at Berkshire has been a presence for many years, acting as a momento mori for the world's third-richest man, who was moved to address the subject of his own death, albeit with typical good humour at the annual meeting in 2007. "I've reluctantly discarded the notion of my continuing to manage the portfolio after my death," he said, "abandoning my hope to give new meaning to the term 'thinking outside the box'."

Two other candidates for Combs' job dropped out of the running, including the Chinese-American hedge fund manager Li Lu, who had been identified as a potential successor on the front page of the Wall Street Journal over the summer. Buffett said the Berkshire board planned to spend at least half its next meeting on the issue of succession.

But if it is still not entirely certain how Berkshire will look after Buffett's death, it is at least clear what will happen to his enormous fortune, estimated at $47bn. In 2006, he announced plans to donate almost his entire wealth to the Bill and Melinda Gates Foundation, which focuses on world health, fighting such diseases as malaria and HIV/Aids.

The following correction was printed in the Guardian's Corrections and clarifications column, Monday 1 November 2010

We reported below a calculation that putting $1,000 into Warren Buffett's company Berkshire Hathaway in 1965 would have produced $4.3bn for an investor by the end of 2009. We meant $4.3m.